Bruce Brammall, 11 April, 2018, Eureka Report
SUMMARY: Some of the real power behind downsizer contributions might be how you combine them with non-concessional contributions.
Downsizer Contributions eligibility starts on 1 July and the interest in making use of this new strategy is growing.
To that end, I want to update you with a real client situation, because some of the intricacies of the rules as they relate to this couple are more than interesting and take in multiple aspects of the new contribution opportunity.
Getting up to $300,000 each into super as a Downsizer Contribution (DC) is going to be very valuable for many, particularly as it could be $600,000 combined for a couple.
But what if you could double that figure and get up to $1.2 million at the time of selling your home by also using the non-concessional contribution rules?
Firstly, let’s go over the rules surrounding DCs, as the ATO lists them on their website.
The ATO’s rules regarding Downsizer Contributions:
- you are 65 years old or older at the time you make a downsizer contribution (there is no maximum age limit)
- the amount you are contributing is from the proceeds of selling your home where the contract of sale was exchanged on or after 1 July 2018
- your home was owned by you or your spouse for 10 years or more prior to the sale
- your home is in Australia and is not a caravan, houseboat or other mobile home
- the proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT (acquired before 20 September 1985) asset
- you have provided your super fund with the downsizer contribution form either before or at the time of making your downsizer contribution
- you make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually the date of settlement
- you have not previously made a downsizer contribution to your super from the sale of another home.
There are other rules regarding these contributions. For more information, search the internet for “ATO downsizer contributions”.
Now for an interesting client situation.
Relevant facts: Husband, 71, retired, and wife, who turns 65 in September, 2018, who is still working. They are looking to sell their home soon to move interstate and wish to maximise their contributions into super. They also want to gift around $150,000 to one of their children. The house is worth around $1m and virtually debt free.
They don’t know exactly when the home will sell as it’s not in a metropolitan area.
Question: “Can we put it on the market now and then just have it settle after 1 July?”
Yes and no. You can put the property on the market now with agents, but you can’t sign a contract of sale until after 1 July this year. Contracts entered into before 1 July won’t be eligible for people to make a Downsizer Contribution (DC).
Question: “So, can I make a condition with the agent that no contract is signed before 1 July?”
Yes you can. The agent might not like it, but if you explain your position, they should understand. And I would suggest you do so, so they know. Ultimately, the contract usually wouldn’t become binding until you sign it anyway, so you should make sure you don’t sign it until after 1 July.
Question: “What sort of settlement date should we have?”
In this situation, it could certainly be advantageous if the settlement occurred in August. The wife turns 65 in early September. If they receive the settlement funds before she turns 65, then she would be able to put in $300,000 in non-concessional contributions before she turns 65, using the pull-forward rule. If she doesn’t receive the funds until after her 65th birthday, then she would be limited to making an NCC of $100,000 and then only if she met the work test.
In this situation, both husband and wife would need to make their $300,000 DCs within 90 days of receiving the settlement funds. So, the wife could potentially make two contributions of $300,000 – one of NCCs and the other as a DC.
Question: “So how much could we possibly get into super?”
Somewhere between $600,000 and $1 million.
If settlement funds are received in time to be able to make the $300,000 NCC for the wife, then you should be able to make total contributions of $900,000. That’s two lots of $300,000 in DCs, plus another $300,000 for the wife as an NCC, using the three-year pull-forward rule.
You could potentially get another $100,000 in to super for the husband, if he was prepared to meet the “work test” for the year in which the contribution was being made. The work-test requires the 74-years or under member to work 40 hours of work in a 30-day period during the financial year. I was told, quite simply, that this would not happen!
Question: “And we want to make a gift of $150,000 to one of our children. Where should we pay that from?”
There were two options for this couple. The wife still has a reasonable amount in super. But also has a near-unused line-of-credit against the home.
As the aim of this is to get as much into superannuation as possible, then it would make sense to use the line of credit to provide the gift, with the loan being paid out when the property settles.
At these ages, it is difficult to get money into super … so don’t use it to cover short-term funding issues if you can avoid it.
The cost of this was going to be paying interest on $150,000 for a (hopefully) short period, if the property sells in a reasonable period of time. The cost of $150,000 in interest, at 5.5%, for four months, is around $2750. Keeping that extra $150,000 in super is likely to be far more valuable over a longer period of time.
Question: “My husband no longer has a super account. Can he still make a Downsizer Contribution?”
There is nothing in the regulations to say that you need to have open superannuation fund in order to make a DC. You would, however, obviously need to open one. And this is something that I would recommend investigating ahead of the property being settled, with aim of also filling out paperwork in advance.
Funds are not required to accept DCs, so it would be wise to ask them if they do accept them before you go ahead and do the paperwork.
Question: “Anything else we need to be mindful of?”
Yes. In regards to the above, you will, of course, need to be aware that if you are going to make a $300,000 NCC contribution, you will need to be eligible under the new rules surrounding NCCs when you are close to the $1.6 million transfer balance cap.
If you have more than $1.5m in superannuation, then you are limited to making $100,000 in NCCs. If you have between $1.4m and $1.5m in super, then you can make no more than $200,000 of NCCs, which is the current year and one year of pull forward. If you have less $1.4m in super, you could potentially make the maximum NCC using the pull-forward rules, of $300,000.
Also, you will need to be aware of whether or not your contributions in previous years have triggered the pull-forward provisions, because this could also limit how much you could contribute under these rules.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: firstname.lastname@example.org . Bruce’s sixth book, Mortgages Made Easy, is available now.